• UMS HOLDINGS LIMITED (SGX:558)'s 1H19 core net profit of S$8.1m formed 52% of our FY19 forecast; we deem this in line given its past nine years' 1H average of 53%.
• Gross material margin was maintained at 53.1% in 2Q19 (1Q19:53.1%) despite the revenue decline.
• Challenges remain but we are encouraged by stable orders from its key customer.
• Upgrade to HOLD from Reduce.

2Q19 Deemed in Line With Expectations

• We deem 1H19 performance to be in line with the past nine years' trend. UMS's 1H19 core net profit accounted for 52% of our full-year forecast compared to the average of 53% in the past nine years. Despite the 15% y-o-y drop in revenue, gross material margin was maintained at 53.1% in 2Q19 (1Q19: 53.1%).
• UMS was disciplined enough to cut personnel costs by 10% in response to the revenue decline. Other expenses were cut by 20% y-o-y.
• Associate, JEP Holdings (SGX:1J4) also contributed S$1.3m to the group’s earnings versus a S$75,000 loss in 1H18. 
• Interim DPS of 0.5 Scts was within our expectation. See UMS's dividend history.

We Expect a Profitable FY19

• Key challenges in 2H19 include the US-China trade war and the dispute between Korea and Japan. SEMI predicts that global fab equipment spending is expected to decline 18.4% y-o-y in 2019 but could recover by 11.6% y-o-y in 2020.
• We believe UMS will remain profitable in FY19. We also note that UMS is seeing stable orders from its major customer.

Upgrade to HOLD

• Upgrade to HOLD (from Reduce previously) as we think the 2019 downturn in the semicon industry could be priced in and we expect an industry recovery in FY20.
• Our Target Price remains at S$0.55, still based on an unchanged 1.24x FY19F P/BV (ROE: 12.5%, COE: 10.3%).
• Better-than-expected order momentum from its major customer is a key upside risk to our earnings forecast.
• Unexpected pull-back in orders by its major customer is a potential de-rating catalyst.

Source: CGS-CIMB Research - 15 Aug 2019